British Columbia forest companies have robbed the province of millions of dollars in timber revenues and in some cases they may have been breaking the law to do so, a ministry of forests investigation shows.
The investigation, ordered by Forests Minister Gordon Wilson in response to reports last fall of companies paying junk-wood prices for prime timber, revealed a systematic and pervasive problem in how forest companies harvest, measure and report the value of timber.
Wilson said it strikes at the government’s ability to manage public forests. Although the minister has yet to establish how much revenue has been lost, a separate report by the Sierra Legal Defence Fund, based on a search of the forests ministry’s own data base, claims the scheme could have cost the province $138 million in a 15-month period. The SLDF report is to be released today.
John Werring, SLDF researcher, said all five major forest licensees — Interfor, Weyerhaeuser, TimberWest, Western Forest Products and West Fraser Timber — have engaged in schemes to reduce the price they pay for timber, a practice known as grade-setting.
In grade-setting, forest companies first log only low-grade timber from a cutblock to have the dollar value for the entire cutblock “set.” They then log the rest of the cutblock, paying the low rate for the remaining wood.
Interfor, which last week reported its strongest earnings performance in six years, did the most grade-setting in terms of both volume and number of cutting permits, Werring said.
“The companies would log minimal volumes, get their stumpage reduced and then go to town,” he said.
The forests minister said he is prepared to act firmly and swiftly against offending companies, bringing in “draconian” regulations if they do not voluntarily reform. Wilson said where violations of the Forest Act can be identified, companies will be charged.
“It behooves us all to clean the system up and clean this up quickly,” Wilson said.
He also said he recognizes the burden coastal forest companies are under — their markets are in retreat and they face high operating costs. He said he would rather work out a cooperative solution to end the scheme.
If he cannot get cooperation, the alternative is sending a police force into the woods to ensure compliance with provincial forestry laws, Wilson said.
The minister intends to:
– Meet as soon as possible with companies to see if the issues can be dealt with cooperatively.
– Increase investigative activities of forest licensees and proceed with enforcement action where necessary.
– Establish greater legal accountability for registered professional foresters — requiring them to sign and seal documents — to counter pressure from companies.
Industry leaders responded by saying they welcome the chance to sit down with the minister to discuss the entire stumpage issue, but insisted they are doing nothing illegal. They say the problem is related to British Columbia’s stumpage system, which sets a target for collecting revenues rather than basing stumpage on actual market prices.
“We do know people are grade-setting. We still compare it to optimizing your income tax by taking advantage of legal deductions,” said Brian Zak, president of the Coast Forest & Lumber Association. “All of this is more evidence of just how badly the system is broken.”
Steve Crombie, director of public affairs for Interfor, said the problems laid out by the minister “sound like all the symptoms of a bad system.”
“Sometimes you have to get to a crisis point before you begin to look at solutions,” he said. “As soon as the minister gives the word, we will be there.”
Wilson said the actions of the forest companies in attempting to pay less for their timber jeopardize any future settlement with the United States over lumber exports. It also provides fuel to international environmental campaigns against B.C. products and deprives the public of forest revenues.
“There is no question: There has been an impact on government revenues and we are going to have to address that,” he said. “We need to go back and collect.” Although the total amount of lost revenue has yet to be calculated, the government will be seeking repayment in individual cases where the amount can be identified. Ministry staff say it is difficult to put a dollar value on the scheme because if companies were not able to get reduced stumpage rates, they may not have logged the wood.
Werring said the SLDF does not accept that argument. Companies were logging prime cedar and cedar markets are strong. He said even small business loggers — who were paying full price and more for their timber — were able to make money on cedar.
The issue of timber payments became public last fall when workers at Interfor’s Squamish dry-land sort told The Vancouver Sun they were grading prime timber at a value no better than pulp wood. The workers said they were intimidated by co-workers who felt their jobs depended on the company being able to continue grade-setting.
A subsequent Sun investigation of cutting permits showed forest companies were able to adjust the amount of stumpage they pay by shipping out enough low-grade logs to set the stumpage rate as low as 25 cents a cubic metre and then bringing out high-grade logs worth up to $40 a cubic metre at the lower price. In one case, TimberWest paid only $22,700 for timber that was originally valued at $3.7 million.
Wilson said he sympathizes with the problems forest companies are facing under the current stumpage system, which is based on the government setting a revenue target and then using a complex regulatory regime to collect those revenues. The system has been in place since the 1980s, a response at that time to American complaints that B.C. forest companies were subsidized.
“This is no longer a useful way to calculate stumpage. The market is different in the 2000s than it was in the 1980s. We do have to work on that stumpage system. We are doing that in trying to move to a more market-based system. From my point of view we can’t get there fast enough,” said Wilson.
“I understand the frustration of the industry, which is why I don’t want to come in with draconian measures — go in with a hard enforcement policy — prior to giving the companies an opportunity to explain why they are doing what they are doing.”
– – –
INVESTIGATION’S KEY POINTS
The forests ministry investigation discovered:
– Companies are adjusting the grade of timber harvested by delivering a set volume of low-grade timber to the sorting yard for scaling. Once stumpage is set, sometimes as low as 25 cents a cubic metre, they then bring in higher-quality wood worth up to $40 a cubic metre.
– Companies are storing high-grade logs at roadside landings — a practice called cold-decking — while they wait for the stumpage to be set on the low-grade logs already at the log-sort. Cold-decking is a violation of the Forests Act.
– By hauling out logs 10 to 20 metres in length with tops no more than 10 centimetres across, companies are using legal scaling procedures — where the top diameter of the log determines the grade of the entire log — to disguise the fact that the butt-end, sometimes more than four metres across, is a premium-grade log.
– Data gathered by companies about the timber before it is harvested and about costs that can be legitimately deducted from stumpage payments may not be accurate. To ensure the data is what the company claims it to be, the government is proposing that registered professional foresters sign and seal documents, putting their professional reputation behind the data.